After struggling for years in the wake of the Great Recession, the steel industry is gradually turning around as economies haltingly recover and steel demand increases. The global growth engine of China needs high-quality steel as the country continues to stimulate its economy with massive infrastructure investment.
These trends are lifting the sales and profits of ArcelorMittal SA (MT), the world’s largest steelmaker. On Nov. 7 it reported that operating profits doubled in the third quarter to $959 million, up from $477 million the year before. Sales in the quarter grew 2.6% to $20.1 billion.
Nonetheless, the stock is down nearly 30% this year as worries about faltering global growth persist. Could MT stock be an opportunity for investors?
A Cyclical Business
Steel is cyclical, but ArcelorMittal has weathered the inevitable ups and downs of global economies by keeping a lid on costs, vertically integrating, pulling the plug on unprofitable operations and strategically investing in regions that are positioned for long-term steel demand.
Unlike major competitors such as United States Steel (X), Luxembourg-based ArcelorMittal enjoys a heavy exposure to fast-growing emerging markets that are still putting in place the steel-intensive building blocks of modern industrial society.
In China, ArcelorMittal is a preferred supplier with an entrenched client base. Increasing production and low iron ore and coal prices are boosting the steelmaker’s margins.
ArcelorMittal boasts the distinction of being vertically integrated. Not only are its steel mills located relatively closer to the areas of greatest steel demand, the company also mines iron ore and coal to meet most of its own needs. The company’s mining operations sell roughly 40% of their production to the parent company’s blast furnaces.
The travails of the recent recession, especially in Europe, compelled ArcelorMittal to implement cost savings, by streamlining steel plants, shuttering less competitive lines, and “right sizing” its labor force. The $20.9 billion market cap company paid down much of its debt load.
ArcelorMittal also has made several significant investments in future growth, creating new steel-making factories in places where demand is likely to be greatest, such as South America. Brazil generated about 60% of the company’s operating income in the third quarter, making this vast developing nation a strategic asset for the company.
ArcelorMittal also is a big player in the U.S. For example, the company recently purchased a finishing mill in Alabama from its largest competitor, ThyssenKrupp (TYEKF).
Putting the Pedal to the Metal
ArcelorMittal reported third-quarter fiscal 2014 net profit of $22 million, a significant improvement over the $193 million loss posted in the same quarter a year ago (then it booked a $101 million charge for canceling plans for a new mine in Senegal). It was the company’s second consecutive quarterly profit. Its net profit was $52 million in the second quarter.
In another key sign that the company’s cost-cutting and vertical integration are paying off, MT reported that earnings before interest, taxes, depreciation and amortization (EBITDA) reached $1.9 billion, a jump of 11% compared to the previous year’s third quarter.
As European economies sputter and the U.S. shows steady but vulnerable growth, ArcelorMittal’s edge in emerging markets will continue to buoy operating results. GDP numbers may show relative weakness in some of these developing markets, but a rising middle class is nonetheless buying more cars and governments are building more skyscrapers, bridges, and other big-ticket investments that are impossible without steel.
Now that ArcelorMittal has shrugged off previous losses and is in the black, investors can expect the world’s biggest steelmaker to truly show its mettle over the long haul.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
